Ast Revaluation or Impairment: Understanding the Accounting for Fixed Asts in Relea 12
Brian Lewis
eprenti
Introduction
Significant changes in financial reporting requirements have transformed the fixed ast accounting framework of companies. International Financial Reporting Standards (IFRS) require fixed asts to be initially recorded at cost, but there are two accounting models – the cost model and the revaluation model. So what’s the difference, and when should you consider revaluation versus impairment? What important changes does R12 bring to fixed asts? IFRS and U.S. GAAP Reporting in Oracle® E-Business Suite
Although it is clear that the Securities and Exchange Commission (SEC) will not be requiring U.S. companies to u IFRS in the near future, most players in the capital markets tend to agree that it is inevitable that IFRS will eventually become a more significant part of the U.S. financial reporting environment. This is actually occurring to an extent as more than 400 global companies bad outside
the U.S. are being allowed to file US Securities and Exchange (SEC) financial reports (10K and 10Q – generally referred to as annual/quarterly financial reports). For overas companies who do not file in the U.S. with the SEC, IFRS is becoming the world standard for financial reporting. For companies who live in multiple capital markets, there may actually be a dual reporting requirement of both IFRS and U.S. GAAP (Generally Accepted Accounting Principles) financial statements.
With Relea 11i and subquently with Relea 12, Oracle ® E-Business Suite (EBS) has added functionality to allow urs to live in both the IFRS and U.S. GAAP worlds. The differences between the two reporting frameworks are extensive; but for the purpos of this white paper, we will focus on fixed asts accounting within EBS – specifically ast revaluation or impairment.
Under U.S. GAAP, fixed asts are recorded at historic cost and are then depreciated to a disposal or residual value. If there are certain indicators that the realizable value of the fixed ast has negatively changed, then the ast is written down and a loss is recorded. This is referred to as impairment.
Under IFRS, financial statement issuers have the option to choo either the cost model (which is in most respects similar to the U.S.GAAP model) or the revaluation model (for which there is no paralle
l reporting under U.S.GAAP). Under the revaluation model, fixed asts may be periodically written up to reflect fair market value – something that is specifically prohibited under U.S.GAAP and SEC authority.
The balance of this white paper will focus on fixed ast revaluation and impairment under both U.S.GAAP and IFRS. Prior to diving deeper into this subject, it is uful to run through a list of R12’s new features relating to fixed asts.
New and Changed Features in Relea 12 for Fixed Asts
Oracle® E-Business Suite (EBS) R12 has a number of valuable new features, many of which were made to fixed asts, including:
•Subledger Accounting (SLA) architecture – Oracle Asts is fully integrated with SLA, allowing for multiple accounting reprentations for a single transaction or business event.
•Enhanced mass additions for legacy conversions – U the mass additions process to convert data from a previous ast system.
•Automatic preparation of mass additions – Default rules and public Application Programming Interfa
ces (APIs) that can be ud to complete the preparation of mass addition lines automatically.
•Flexible reporting using XML Publisher – Thirteen customizable new ast reports.
•Automatic depreciation rollback – Rollback can be executed on lect asts as required vs. the entire ast book, and it is no longer required to be run manually.
•Enhanced functionality for the energy industry.
•Retirements and revaluations are now allowed in the period of addition.
The many benefits of the additions include process efficiencies, flexible accounting and reporting and industry enhancements. From an acquisition or divestiture perspective, legacy system conversions from disparate standards such as U.S. GAAP and IFRS are specifically addresd.
So how are U.S. GAAP and IFRS the same and where do they differ when addressing fixed asts?
Comparing IFRS and U.S. GAAP for Business Combinations/Fixed Ast Accounting
The table below summarizes and compares U.S. GAAP and IFRS requirements for fixed asts after an acquisition.
U.S. GAAP IFRS
Depreciation Same Same
Revaluation Prohibited Allowed/Create Revaluation Surplus
Depreciation after Revaluation N/A Allowed
Impairment Direct Write Down Write Down to Revaluation Surplus
First, then Direct Write Down
U.S. GAAP is a conrvative rule-bad accounting standard that focus on P & L (profit and loss) financials for u of owners of the entity (shareholders), while IFRS is more of a principle-bad accounting standard that focus on the balance sheet primarily for creditors of the entity.
The significant differences in fixed asts between U.S. GAAP and IFRS are in the areas of revaluation, revaluation surplus and impairment as previously noted, all of which are defined below:
Revaluation of Fixed Asts – Revaluation of a company's asts takes into account inflation or chan
ges in fair value since the asts were purchad or acquired. There must be persuasive evidence to revalue. The change in value is credited to the revaluation surplus (rerve) account. A downward revaluation is considered impairment.
Revaluation Surplus (Rerve) -The increa in value of fixed asts due to the revaluation of the fixed asts is credited to revaluation surplus (rerve).
Impairment of Fixed Asts – Impairment of a fixed ast occurs when the realizable value of an ast, as shown in the balance sheet, exceeds its actual value (fair value) to the company. When impairment occurs, the business must decrea its value in the balance sheet and recognize a loss in the income statement.
Cost Model vs. Revaluation Model for Fixed Asts
Cost Model
In the cost model, the fixed asts are carried at their historical cost less accumulated depreciation and accumulated impairment loss. There is no revaluation or upward adjustment to value due to changing circumstances. This is similar to the model currently in u by U.S. GAAP.
Example
Acme Ltd. purchad a building worth $200,000 on January 1, 2008. It records the building using the following journal entry:
Building 200,000
Cash 200,000
The building has a uful life of 20 years, and in this example the company us straight line depreciation. Yearly depreciation is $200,000/20 years, or $10,000. Accumulated depreciation as of December 31, 2010, is $10,000*3 or $30,000, and the carrying amount is $200,000 minus $30,000, which equals $170,000.
We e that the building remains at its historical cost and is periodically depreciated with no other upward adjustment to value. If an ast is subquently valued down due to impairment, the loss is charged to the income statement as impairment loss.
孕妇能吃苋菜吗Revaluation Model
In the revaluation model, an ast is initially recorded at cost, but subquently its carrying amount may be incread to account for appreciation in value. The difference between the cost model and revaluation model is that the revaluation model allows both downward and upward adjustment in value of an ast, while the cost model allows only downward adjustment due to impairment loss. This is the model currently adopted by IFRS.
Example
Consider the example of Acme Ltd. ud in the cost model. Assume that on December 31, 2010, the company intends to switch to a revaluation model and carries out a revaluation exerci which estimates the fair value of the building to be $190,000 (again, at December 31, 2010). The carrying amount at the date is $170,000 and revalued amount is $190,000, so an upward adjustment of $20,000 is required for the building account. It is recorded through the following journal entry:
Building 20,000
Revaluation Surplus 20,000
Revaluation Surplus
Upward revaluation is not considered a normal gain and is not recorded on the income statement; rather it is directly credited to an equity account called revaluation surplus. Revaluation surplus holds all the upward revaluations of a company's asts until tho asts are dispod.
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Depreciation after Revaluation怎么装双系统
The depreciation in periods after revaluation is bad on the revalued amount. In the ca of Acme Ltd., depreciation for 2011 was the new carrying amount divided by the remaining uful life, or $190,000/17 which equals $11,176. Reversal of Revaluation
If a revalued ast is subquently valued down due to impairment, the loss is first written off against any balance available in the revaluation surplus. If the loss exceeds the revaluation surplus balance of the same ast the difference is charged to the income statement as impairment loss.
Example
五年级作文Suppo on December 31, 2012, Acme Ltd. revalues the building again to find out that the fair value should be $160,000. The carrying amount as of December 31, 2012, is $190,000 minus two years depreciation of $22,352 which amounts to $167,648.
The carrying amount exceeds the fair value by $7,648, so the account balance should be reduced by that amount. We already have a balance of $20,000 in the revaluation surplus account related to the same building, so no impairment loss will go to the income statement. The journal entry would be:
Revaluation Surplus 7,648
Building Account 7,648
Had the fair value been $140,000, the excess of the carrying amount over fair value would have been $27,648. In that situation, the following journal entry would have been required:
Revaluation Surplus 20,000
建水旅游攻略必去景点Impairment Loss 7,648
再生骨料混凝土
Building 20,000
Accumulated Impairment Loss 7,648
Gain in Value of Building 300,000
Revaluation Surplus 20,000
EBS Considerations for the Revaluation Model
In EBS, you can revalue all categories in a fixed ast book, all asts in a category, or just individual asts. Revaluing all categories in a book or all asts in a category is considered “Mass Revaluation” – that is, you can revalue asts en mas. Revaluing individual asts is effected on an ast-by-ast basis.
Regardless of the method ud, a prerequisite to performing an ast revaluation is tting up your revaluation rules and accounts, which is done when you define your depreciation books. If you choo to allow revaluations, you must specify your revaluation rules – specifically, whether you will allow EBS to “[r]evalue accumulated depreciation. If you do not revalue accumulated depreciation, Oracle Asts transfers the accumulated depreciation to the revaluation rerve account.”i
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The Mass Revaluation process includes the following steps:
•Create Mass Revaluation Definition
•Preview Revaluation
•Run Revaluation
•Optionally Review Revaluation
To revalue all asts in a category:
•Navigate to the Mass Revaluations window
•Enter the Book for which you want to revalue asts
•Enter a Description for the revaluation definition (IMPORTANT: Note the Mass Transaction Number) •Specify revaluation rule.
•Enter the category you want to revalue
•Enter the revaluation percentage rate to revalue your asts. Enter either a positive or negative number.
•Override default revaluation rules if necessary.
•Choo Preview (Note: You must preview before EBS will let you proceed)
•If, after previewing, you need to make changes, edit the revaluation rule or percentage.
•Find the revaluation definition using the Mass Transaction Number.
•Choo Run. Oracle Asts begins a concurrent process to perform the revaluation.
•Review the log file after the request completes.
To revalue an individual ast:
•Enter the ast number you wish to revalue instead of a category.
Revaluation Functionality is Not for Fixed Ast Revaluation Under Purcha Accounting Rules
One area of confusion that we have encountered veral times is whether the ast revaluation functionality of Oracle EBS can be ud to revalue asts of an acquired company.
Under Financial Accounting Standard 141(R) and IFRS 3, Business Combinations, companies are required to revalue their asts to fair value at date of acquisition. This is mandatory for all companies that have to file annual reports with the SEC or roll-up into an SEC reporting company. For our purpos, this means just about everyone. The same applies to IFRS reporting companies. It ud to be that companies could u pooling of interest where they could just leave the fixed asts from the acquired company’s books as-is for cost, accumulated depreciation, and date in-rvice. This is no longer allowable.
Since under both U.S. GAAP and IFRS there is no such thing as a "merger," there will always be a company identified as the acquired. For this company, all fixed asts need to (1) be restated to fair value at date of acquisition; (2) have the date in rvice restated to date of acquisition; and (3) have any accumulated depreciation zeroed out. If a company can support a contention that netting accumulated depreciation with cost is materially the same as fair value, the acquired company may do that, but the net value has to be migrated to the original cost field, the accumulated depreciation zeroed, and the date in-rvice still ret to date of acquisition. If the company is restating to fair value and cannot u the netting method, then a number of new fair values must be done for each of the fixed asts.
Oracle Mass Revaluation (OMR) functionality will not work for the types of revaluations for the following reasons:
1.The date placed in-rvice must be changed to date of the business combination – OMR does not support
this.
2.OMR mass and category revaluation will not accommodate netting accumulated depreciation or lo
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multiple, non-percentage driven fair value restatements.
3.Individual ast revaluation is impractical for large numbers of asts and also does not accommodate
netting accumulated depreciation or retting the date placed in rvice.
For ast revaluations needed as a result of a business combination, using OMR is not a viable option.
